What is ‘Fiscal Deficit’? Will Budget 2018 see Arun Jaitley stick to target?

Budget 2018: Finance Minister Arun Jaitley is all set to table Budget 2018 on February 1. Like every year, there will be a set of technical economic terms which people will hear during Arun Jaitley's Budget speech. One such important term is "Fiscal Deficit."

Budget 2018: Finance Minister Arun Jaitley is all set to table Budget 2018 on February 1. Like every year, there will be a set of technical economic terms which people will hear during Finance Minister Arun Jaitley’s Budget speech. One important term to be understood is “Fiscal Deficit.” Every year, Finance Minister sets a fiscal deficit target and informs in the Budget if the target set in the previous year was breached or not. Here’s a quick look at what is Fiscal Deficit and where will it find its place during the presentation of Budget 2018:

What is Fiscal Deficit?

In general terms, a fiscal deficit arises whenever the government makes more expenditure than the revenue it brings in during the fiscal year. The imbalance is also known as current accounts deficit or the budget deficit. Technically, the difference between total revenue and total expenditure of the government is termed as fiscal deficit. This is an indication of the total borrowings needed by the government. Borrowings are not included while calculating the total revenue. In general, fiscal deficit takes place due to two reasons – revenue deficit or a hike in capital expenditure. Capital expenditure is incurred to create long-term infrastructure as factories, buildings and other development.

The government finances its deficit through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds. A country’s fiscal deficit is usually communicated as a percentage of its gross domestic product (GDP). The increased fiscal deficit is considered fatal for the economy, while a balanced fiscal deficit in an economy means that cost of expenditure is low while production and growth is advancing. Further, if there is an increase in fiscal deficit it means that the government is spending too much, while it’s earnings, which mainly through taxes in India, are less in comparison. Hence, it is important that the government keeps its expenses under control.

A look at the Fiscal Deficit

In Budget 2018, Finance Minister Arun Jaitley is expected to announce a slippage in the fiscal deficit target for 2017-18. In India, fiscal deficit targets are set as a percentage of country’s GDP. In Budget 2017, Jaitley had set a fiscal deficit target of 3.2% for FY-18 and that of 3% for FY-19. Fiscal discipline and the ability to meet fiscal deficit targets is one of the key economic measures that ratings agencies, investors and economists look at when assessing the economic growth and investment potential of a country. Thus, any widening of the fiscal deficit is usually looked at warily by experts – both domestic and global.